Monday, November 8, 2021

Interest rates definitely to rise - sometime, maybe

The geniuses in the financial markets – and they must be geniuses because they’re paid far more than we are – think next year will be an absolute ripper. Workers will be getting their first decent pay rise in six years or more. Say, 3 to 4 per cent. Whoopee. Gee, thanks guys.

Find that hard to believe? So do I. It’s the logical implication of the bets they’re making that the Reserve Bank will begin lifting its official interest rate – which has been at almost zero for a year – by the middle of next year and be up to 1 or 1.25 per cent by the end of next year.

For that to happen, the underlying or core rate of inflation, which has been below the bottom of the Reserve’s 2 to 3 per cent target for years and only just a few weeks ago lifted its head to 2.1 per cent, would need to have shot up close to 3 per cent.

And, because the inflation rate doesn’t rise sustainably unless it’s being driven up by rising wages, an inflation rate approaching 3 per cent couldn’t happen without annual pay rises averaging 3 to 4 per cent.

Reserve Bank governor Dr Philip Lowe has spelt out this relationship between inflation, wages and interest rates almost every time he’s opened his mouth since even before the arrival of the pandemic. He did so again twice last Tuesday and once on Friday.

So pay rises of unheard-of size are the logical implication of the money market’s bets that the Reserve is about to become so desperately worried about soaring wages that it will have raised the official interest rate four or five times in the next 12 months.

Trouble is, I doubt the financial market players are thinking logically. I doubt they’ve thought it through to the extent I just described. The economists who work in the financial markets are well-educated, but this episode makes me wonder whether the guys laying bets in the dealing room even have wages in their mental model of what drives inflation and interest rates.

By the way, I’m not just being disparaging in describing the financial markets as a casino. As Professor John Kay explained in his book Other People’s Money, the buying and selling of currencies, bonds and other real and derivative securities each day in the world’s financial market dwarfs the number of transactions needed by real businesses to conduct their ordinary affairs.

Indeed, Kay told me those genuinely necessary transactions could be put through in about a quarter of an hour a week. So, what are all the remaining transactions? They’re dealers using their bank’s money to trade with dealers from other banks in the hope of making a quick million or two and a fat bonus at the end of the year.

I’m sure these professional gamblers are better at playing poker than you or I would be, but they aren’t trained economists, and they don’t think like economists. Certainly, not like central bank governors.

Because Wall Street has the greatest single influence over what happens in the global financial markets, these guys know more about what’s happening – and likely to happen – in the American economy than their own.

They also have a huge superficial knowledge of what’s been happening in lots of economies in the past few weeks. They know inflation has shot up in the US, Britain and a few other countries, wages have increased somewhat in the US and a few other places, and some minor central banks have started raising their official interest rates.

I think these guys’ mental model of what’s driving interest rates is no more profound than this: prices and wages are rising in the US and other places, rates are already rising around the world, so pretty soon rates will be rising here.

Lowe, the man with his hand on the lever, says he still doesn’t think a rate rise will be needed until 2024, but last week he admitted things could turn out stronger than he expects and make a rise necessary in 2023.

There you are. He’s as good as admitted he’ll have no choice but to start raising rates in a few months’ time. Anyway, that’s what we’re betting on. If we turn out to be wrong, it wouldn’t be the first time, and we won’t lose our jobs. We’ll just lay new bets and keep doing it until we’re right.

Which they will be – one day. Since rates can’t go lower it’s a cert that the next move will be up. Right now, when they’ll be going up is known only to God. In the absence of inside intel, I’d rather put my money on Lowe than on those geniuses.

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Friday, November 5, 2021

Masterpiece: the spin is Morrison's plan to reach net zero is dizzying

The more our politicians are full of bulldust – known euphemistically as “spin” – the more they rely on our short attention span. They make a grand announcement that doesn’t bear close scrutiny, but the media caravan moves on before it’s had time for a closer look. Well, not this time.

I’ve been looking more closely at the Plan to achieve net zero emissions of greenhouse gases by 2050 that Scott Morrison unveiled last week, shortly before jetting off to Glasgow.

It’s full of . . . hyperbole. A masterpiece of the spin doctor’s art. A document carefully crafted to mislead.

For someone claiming to have a Plan to achieve a difficult objective over the next 29 years, it was surprising to see Morrison claiming the Plan contained no new policy measures. By implication, no additional cost to taxpayers.

That’s true – and untrue. We know, for instance, that Morrison had to promise to spend a lot of money just to get the National Party’s permission to commit to achieving net zero by 2050.

So, what policy promises did Morrison make, and how much will they cost? We weren’t told. They weren’t mentioned in the 130-page plan. We’re told we’ll be told sometime before the election.

The Plan says Morrison’s “technology investment roadmap” will “guide” more than $20 billion of government investment in low emissions technology to 2030. So, further spending of $20 billion?

If that’s what you thought, the spin merchants would be pleased. They love giving the impression we can have our cake and eat it. But no, this is not new policy. All the $20 billion has already been announced.

And much of it has already been spent. Much of it by the previous Labor government. A bit over half of it is spending by the Australian Renewable Energy Agency and the Clean Energy Finance Corporation.

These were set up by the evil Julia Gillard in 2011, in association with her job-destroying and cost-of-living killing carbon tax. Tony Abbott tried to abolish them along with the tax, but failed.

Now they’re produced as evidence of how much the Morrison government’s doing to promote new emissions-reducing technology.

The Plan claims the government’s $20 billion will “leverage” more than $80 billion from government and the private sector by 2030. (What it doesn’t mention is that Australia’s total spending on research and development has plummeted since the Coalition returned to power in 2013.)

As to whether the Plan commits the government to spending a lot more, note that the modelling showing we can get to net zero by 2050 rests on various assumptions about the success of future new technology in producing clean products at specified low costs.

For instance, clean hydrogen will be produced for under $2 a kilogram. Carbon emissions from fossil fuels will be captured and stored at a cost of less than $20 a tonne.

But these happy assumptions come with an asterisk. The asterisk leads to very fine print saying “subject to offtake agreements”.

Oh yes, what are they? The Plan doesn’t say. But they’re the government agreeing to buy loads of the clean product at a price that allows the real customers to pay a very low price. That is, it’s a massive subsidy.

How much will the government buy? At what price? Morrison couldn’t tell us if he wanted to because these deals are way off in the future – if they ever happen. They’re not a new policy to spend taxpayers’ money, they’re just an assumption the modellers needed to make - that the necessary money would be spent - to achieve their prediction that we’d get to net zero by 2050.

You’ve noticed that the Coalition which, ever since Abbott rolled Malcolm Turnbull as Liberal opposition leader in 2009, has been vigorously opposed to doing anything much to reduce emissions, has now embraced the net zero target.

But have you noticed that now he’s big on reducing emissions, Morrison is quietly rewriting history to remove any trace of that former opposition? Worse, have you noticed Morrison is now taking credit for any progress we’ve made to date?

Any progress made by the policies of his evil Labor opponents and – as with the pandemic – any progress owed to the policies of those appalling premiers?

This is why politicians have spin doctors. “Our Plan will continue the policies and initiatives that we have already put in place and that have proven to be successful, reducing emissions and energy costs,” some spinner wrote.

Next, Morrison’s claim that Australia’s on track to reduce emissions by “up to” 35 per cent by 2030, well above the government’s target of 26 to 28 per cent. Independent analysis commissioned by the Australian Conservation Foundation confirms this is quite believable.

But, apparently, it’s all the Morrison government’s doing. He speaks of “our record of reducing emissions and achieving our targets” and “our strong track record, with emissions already more than 20 per cent lower”. “We have already achieved 20 per cent,” his energy minister says.

But Bill Hare, of Climate Analytics, says the feds are doing little, but claiming credit from the hard work of the states and territories.

It was the NSW and Queensland governments that saved most of the 20 per cent by restricting land clearing. It’s the states that encouraged the record rollout of rooftop solar and large-scale renewables.

NSW, Victoria, the ACT and South Australia have strong electric vehicle policies. Meanwhile, Morrison & Co have been encouraging gas production with new subsidies – which, of course, won’t be paid for by increasing your taxes.

Spin is claiming credit for any good thing, but blaming others for anything bad. You’ve heard that the Plan “will not cost jobs, not in farming, mining or gas”.

But the actual promise says that “not one job will be lost as a result of the government’s actions or policies under the Plan”.

Get it? Jobs will be lost, but we’ve set it up so no one will be able to blame us.

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Wednesday, November 3, 2021

Net zero can't be reached by magic, but we can ease the pain

Scott Morrison’s long-term plan for net zero emissions by 2050 won’t impress anyone who’s been following Australia’s long and tortuous battle over climate change. But then, it’s not intended to.

His “learning” after miraculously wining the unwinnable election in 2019 is that whatever half-truths he tells voters will be believed by enough of them. Particularly since God is on his side, not the side of those other, untruthful and ungodly people.

No, his Plan – which is not a plan to achieve net zero, just an optimistic forecast that it will be achieved – is largely a political document, intended to be sufficient to convince those voters who aren’t paying attention that he’s “doing more” to cope with climate change.

His goal is not so much to fix the climate as to neutralise it as an issue at next year’s election. Climate change is an issue that naturally favours Labor. He wants all the focus to be on two issues that naturally favour the Coalition: the economy and national security.

He was walking a tightrope last week. He had to discourage voters in Liberal heartland seats who were worried about global warming from trying to send their party a message by voting for liberal independents – as they’ve done in Tony Abbott’s former seat and, briefly, Malcolm Turnbull’s – by convincing them he was serious about reducing emissions.

At the same time, however, he needed to reassure voters in the National Party’s various Queensland coal-mining seats that he wasn’t serious.

His solution was to produce a document that says: the boffins I hired assure me we’re on track to eliminate net emissions by 2050 but, don’t worry, this will be achieved by the miracle of new technology, without anyone feeling a thing.

There’ll be no new taxes, no new regulations forcing people to do things and no new costs on households, businesses or regions. We won’t shut down coal and gas production, and no jobs will be lost.

Does it sound a bit too good to be true? Voters in the Liberal heartland tend to be well educated and well informed. I doubt it will do the trick.

As we’ve seen with the pandemic, when our federal leaders fail to lead, others feel a need to fill the vacuum. The premiers, of course, but also many people from business and the community.

The latest report from Tony Wood and colleagues at the Grattan Institute, Towards net zero: a practical plan, offers a more realistic assessment of the challenge we face, says why we must get more achieved by 2030 and proposes ways this can be done without too much pain.

Perhaps because he’s not standing for office, Wood is frank about the difficulty in getting to net zero. The scale and pace of change involved in a net-zero target are “daunting, but they are outweighed by the consequences of the alternative.

“Factors outside Australia’s control will shape the flow of capital and the demand for our exports, while climate change itself will increasingly threaten Australians’ lives and livelihoods.”

Just so. Only a fool would believe we can avoid pain by doing nothing. We can seek to delay the pain, but that would relinquish our ability to influence our future, as well as making the pain greater.

The longer we leave it to make big progress towards net zero, the more pain we ultimately suffer. But also, our failure to throw our support behind the global push for earlier progress – which is what we’re failing to do in Glasgow this week – increases the risk that the goal of limiting warming to 1.5 degrees will be exceeded by the end of this decade, making it less likely we ever get back below it.

But while it’s foolish to think we can avoid pain, we shouldn’t imagine the pain will be intolerable. And here’s the trick: provided it’s done sensibly, paying a bit more tax and putting up with a bit more regulation is actually intended to reduce the amount of pain, and share it more fairly.

Wood accepts Morrison’s figuring showing that we’re likely to exceed the 26 to 28 per cent reduction in emissions by 2030 we promised to make in 2015. But we’ll still fall short of the 45 to 50 per cent reduction we’re being asked to make and other rich countries are agreeing to.

Wood’s plan for getting up to the higher target is neither heroic nor frightening. While we wait for the technological breakthroughs Morrison’s modelling assumes will come, we should get on with applying the technology we already have.

Generate electricity almost completely from renewables, and step up the move to electric cars and vans by tightening emission standards for petrol-driven cars, giving EVs tax breaks and supporting the spread of charging stations.

This is the first step towards the new green manufacturing industries that will provide the regional jobs for miners and gas workers to move to as other countries stop buying our coal and gas.

It won’t be easy or painless, but it’s not beyond the wit of decent governments.

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